How to Optimize Your Restaurant Gift Card Accounting and Bookkeeping

Most restaurant operators understand how gift cards improve cash flow, drive loyalty, and bolster free revenue when unredeemed.

Fewer operators may understand the importance of capturing and reconciling gift card transactions accurately. There’s some important nuances to consider with your restaurant gift card accounting and bookkeeping — especially around fraud detection, reconciliation, and accurate financials.

Read on to learn about the restaurant gift card accounting practices you can instill to help keep your books accurate and mitigate fraud while still taking advantage of all the benefits gift cards provide.

This article was contributed by Raffi Yousefian, CPA and CEO of The Fork CPAs, and Anna Baumgardner, non-profit advisor and marketing manager of The Fork CPAs.

Restaurant gift card accounting and bookkeeping

Gift cards are typically recorded as a liability rather than revenue because your operation is liable for providing goods or services upon card redemption.

The initial purchase of the gift card is not taxed because the final purchase will be taxed. This way, the cash received and the liability recorded are equal.

If the gift card is discounted in any way (or given away), then the entire gross amount of the gift card is recorded as a liability. Any cash received from these instances is recorded as cash on your balance sheet, and the discount portion is recorded as a discount on your profit and loss statement (P&L). 

Here are a few examples to articulate these practices:

Example: A $50 gift card is purchased from your restaurant. On the date the gift card is purchased…

• Cash increases by $50
• Gift Card Liability increases by $50

Example: To incentivize future visits, your restaurant offers a 10% discount on gift card purchases – meaning that a customer can purchase a $50 gift card for $45. When a $50 gift card is purchased…

• Cash increases by $45

• Gift Card Discounts expense increases by $5

• Gift Card Liability increases by $50

Example: A $50 gift card is given away by your restaurant to your 100th customer as a thank you for being a patron. When the gift is determined and granted…

• Gift Card Discounts expense increases by $50

• Gift Card Liability increases by $50

When the gift card is redeemed, the liability is reduced by the redeemed amount, and the sale amount of the transaction is recognized as revenue. 

Example: The $50 gift card above is gifted to a third person. The gift card is redeemed at your restaurant for a purchase of $29.99. When the gift card is redeemed…

• Sales Revenue increases by $29.99

• Sales Tax Liability increases by $1.87 (assuming a 6.25% sales tax rate)

• Gift Card Liability decreases by $31.86 (the $29.99 purchase + $1.87 sales tax paid using the gift card)

Both of these entries can be automated so they automatically post to your accounting system using xtraCHEF by Toast. Once you map the data points, you don’t need to touch it again.

Accounting for restaurant gift card breakage

Not all gift cards are redeemed for their full amount — with some gift cards not redeemed at all. These  unredeemed gift card amounts are referred to as “breakage.” 

How you account for breakage may depend on whether or not you are required to follow Generally Accepted Accounting Principles (GAAP). 

If you are required to have an annual independent audit, you are required to follow GAAP. If you do not have an annual independent audit, you have the flexibility to employ an alternative method that is more digestible by financial statement users. Here’s a look at both methods.

GAAP method of recognizing breakage

Breakage was recognized as a separate type of income prior to 2019. It was only recognized after the gift card’s redemption was considered “remote.” In most cases, this was after a gift card had an outstanding balance for two years or more. 

New GAAP revenue recognition standards as of 2019 require that breakage be recognized as income in proportion to actual redemption. Fortunately, this is typically sooner than redemption being deemed remote. This means that as gift cards are redeemed and actual sales are booked, a portion of the remaining outstanding gift card balance is also reduced from the liability account and recognized as income according to the determined breakage rate.

Example: Say that you have determined your restaurant has a breakage rate of 5%. As in the previous example, a gift card holder makes a purchase of $29.99, which yields $1.87 in sales tax. When the $50 gift card is tendered as payment…

• Sales Revenue increases by $29.99

• Sales Tax Liability increases by $1.87 (assuming a 6.25% sales tax rate)

• Gift Card Liability decreases by $31.86 (the $29.99 purchase + $1.87 sales tax paid using the gift card)

• Breakage Revenue increases by $1.50 ($29.99 sale x 5%)

  • Gift Card Liability decreases by an additional $1.50 to clear the Breakage Revenue. 

If you are using this method, we suggest maintaining a reconciliation sheet that reconciles your gift card liability balance on the books with the gift card liability balance shown in the Guests, Gift Cards, and Loyalty Summary report in Toast. 

This will allow you to track and catch fraudulent gift card redemptions in the POS from period to period.

Alternate method of recognizing breakage

If you don’t have an annual independent audit, you can explore an alternative to GAAP breakage recognition. 

You don’t have to estimate the breakage rate based on historical data and apply it to each gift card redemption. You can instead record the actual amount of breakage via an adjusting “true-up” journal entry each period, then reconcile the gift card balances directly in your POS.

This means you’ll manually evaluate the balances that should be “written off” and recognized as breakage. 

Toast users can use the Toast Guests, Gift Cards, and Loyalty Summary report and Gift Card Balances report to identify the open gift card balances that you will no longer honor. These reports can help you identify those balances and streamline your breakage accounting process. 

This alternative method is easier to implement for the accountant, and easier to understand by users of the financial statements. In order to implement this method, you will have to assign an expiration to your gift cards.

Example: You run a Gift Card Balances report at the end of the month, and see that your Gift Card Liabilities account includes unredeemed balances on cards that are more than 18 months old (the length of time you have given your gift cards before they are considered expired). Your accountant can record a journal entry to “write off” the $200 liability, and recognize the revenue as breakage. This entry will cause…

• Breakage Revenue to increase by $200
• Gift Card Liability to decrease by $200

Gift card accounting for a restaurant group

Restaurant groups can use either GAAP and non-GAAP accounting.*

It’s helpful if your POS system, such as Toast, can track and highlight instances where a gift card is purchased at one location but redeemed at another. This can make it easier to record and reconcile gift card liabilities, revenue, and breakage by location using the same methods above. This applies whether the books for each location are separate or combined.

If gift cards can be redeemed between locations, redemptions may exceed gift card sales at a given location — resulting in a negative liability balance for that location. This is more likely to happen when adding a new location because the new location may not have enough gift card sales to cover the redemptions.

It may seem dire seeing that negative balance, though it’s no worry. The liability from other locations will offset the redemption when consolidating the financials. 

*Accounting for gift cards in a franchise or restaurant group with independently owned units is a different process that will require another article to examine.

How is gift card revenue taxed?

How your gift card revenue is taxed depends on the accounting method used for tax purposes. 

If your accounting method on your tax return is cash basis, all of the proceeds from your gift card sales are taxed in the year you sell the gift cards. If your accounting method on your tax return is on an accrual basis, then the same principle applies unless you elect to defer it. 

Under the deferral election, gift card sales are not taxed — only the amounts redeemed are taxed in the year of redemption. However, if the entire amount of a gift card is not redeemed within a year, the remainder must be taxed in the next year and cannot be deferred beyond two years.

Example: In year 1, you sell $500 in gift cards, and elect to have the tax on those gift card sales deferred. During year 1, $300 of the gift cards are redeemed, leaving $200 outstanding. During year 2, $100 of the gift cards are redeemed, leaving $100 outstanding at the end of year 2. 

• Year 1: $300 of redeemed gift card sales will be taxed.

• Year 2: entire remaining $200 of the $500 sold in year 1 is taxed as if the entire $200 were redeemed.

In order to report taxable gift card amounts accurately, you need to be able to track the remaining gift card balances by gift card sale year. 

Toast users can do this by going to Reports > Guests, Gift Cards, and Loyalty > Gift Card Balances in your platform. There you should be able to see the year of purchase and remaining balance for each gift card. This information can be provided to your tax accountant so they know how to adjust your taxable income.